Suppose that a private monopolist is supplying a good that is nonrival but excludable to a market with demand of P = 24 - 3Q.If the marginal cost of providing this good is zero but the firm charges $18,the monopolist will provide ______ units and the efficient output is __________ units.

Question

Quizplus · Accepted Answer

Since the marginal cost is zero, the monopolist will produce where marginal revenue (MR) equals zero.

MR = P(1 - 1/Ed) 
where Ed is the elasticity of demand.

In this case, Ed = Q/P = Q/(24-3Q) = 1/3 - Q/72. 
At P = $18, Q = 2.

So, MR = $12(1 - 1/(1/3 - 2/72)) = $12(1 - 5/13) = $72/13.

At Q = 2, the monopolist is earning positive profits (since P > MC = 0). 
The efficient output is where P = MC, which is at Q = 8. Therefore, the monopolist is producing an inefficiently low output.

Suppose That a Private Monopolist Is Supplying a Good That